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Presentation at the International Symposion on
RD Outsourcing and Smartsourcing Bucharest,
Romania 20 February 2008
RD Offshoring and Outsourcing
Nurturing Sustainable RD Capabilities in a
Globalized World
Prof. Dr. Alexander Gerybadze Center for
International Management and Innovation Center
for Research on Innovation and Services
(FZID) University of Hohenheim
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RD Offshoring and RD Outsourcing Nurturing
Sustainable RD Capabilities in a Globalized
World The Agenda / Key Issues
Global Innovation / Trends in RD Offshoring
RD Outsourcing / New Partnership Models in
Innovation
Strategic Implications for RD and Innovation
Policy
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Major Trends in the Global Innovation Arena

• RD and Innovation is Key for International
  Competitiveness
• Multinational Corporations are the Drivers of
  Technical Change

• Trend to Globalize RD Persistent RD
  Offshoring
• Trend to Externalize RD RD Outsourcing / Open
  Innovation

• Trend to Commercialize RD
• Trend towards Downstream Innovation

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First of all, Offshoring and Outsourcing need to
be differenciated
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World RD Expenditures strongly concentrated on a
few Countries Within the Triad regions / Gross
Expenditures for RD (GERD) 2005

• World RD Expenditures / GERD 2005 Total 845
  Billion PPP

• By Comparison 27 Billion PPP in Eastern
  Europe (of which 64 in Russia)

Data for 2003 Data for 2004.
Source OECD, Main Science and Technology
Indicators 2006.
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Increasing Global Dispersion of Innovation
Activities / RD Globalization and RD Offshoring
outside of Home Region

Share of RD Outside of Home Region (in )
40
Europe
30
North Amerika
20
10
Japan
1995
2001
1992
1998
Source Gerybadze 2004, p.246 Roberts 2001 /
Global Benchmark Survey on the Strategic
Management of Technology
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Business Expenditures on RD also concentrated on
few Industries which increasingly go Global

RD In- tensity 2006 ()
RD Expen- ditures 2006 (in Mio )
Industry
1. Pharmaceuticals Biotech 2. IT-Hardware
Equipment 3. Automobiles Parts 4. Electronics
Electrical 5. Software Computer Services 6.
Chemicals 7. Aerospace Defence 8. Consumer /
Leisure goods 9. Industrial Engineering 10.General
Industrials
70 523 64 532 60 807 27 139 26 523 17 186 15
991 14 209 9 319 8 868
15.9 8.6 4.1 4.4 9.8 3.1 4.8 6.5
2.7 2.1
Very strong RD Offshoring
Strong RD Offshoring


Source EU Industrial RD Investment Scoreboard
2007, INTERIS Database University of Hohenheim
2007
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RD Offshoring and RD Outsourcing Nurturing
Sustainable RD Capabilities in a Globalized
World Presentation Part 2
Increasing Globalization of RD What does
this mean for Building RD Capabilities in Host
Countries?
RD Outsourcing / New Partnership Models in
Innovation
Strategic Implications for RD and Innovation
Policy
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Increasing Trend towards Downstream Innovation in
many dynamic Industries

• Many Host Countries build up Universites and
  Science base
• but RD Location not just driven by need to
  access Research

Engineering- Innovation / Advanced Manufacturing
Research- based Innovation
Traditional Interpretation / Linear-sequential
Innovation Process

• Most important new drivers for RD Offshoring
• - Access to Advanced Market / Lead Market
• - Manufacturing Excellence / Engineering
  Innovation
• - Strong Innovative Competitors
• - Standard setting / Innovation enhancing
  Regulation

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Case Example Pharmaceuticals Biotech still
Research-based, but strongly dominated by the U.S.
Home-base-Exploiting RD
FOREIGN BASE (e.g. USA)
Transfer of Knowledge to Foreign RD Labs
Where is the most critical concen- tration of
talent? Location with most advanced Scientific
base?
HOME BASE (e.g. Germany)
Leading RD Center in Germany
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European Countries often with Strong Capabilities
in Downstream Innovation
Front-Drive
Rear-Drive
Where is the Engine in the Innovation Process?
ENGINEERING INNOVATION / Advanced Manu- facturing
RESEARCH-BASED INNOVATIONS / Scientific Excellence
LEAD MARKET INNOVATION / Close Access to Lead
Customers
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RD Outsourcing in Germany / Increasing Global
Outsourcing in a few selected Industries

• RD Outsourcing concentrated on a few Industries
  with very
• specific requirements

External RD Expenditures ( 2003 in Mio )
RD Out- sourcing ( of BERD)
Industry
1. Automobiles 2. Chemical Industry 3.
Electronics / Data Processing 4. Machinery 5.
Metall Processing Total / Manufacturing Industries
4 767 1 698 886 300 128 7 940
25.0 21.1 10.4 7.3 13.5 18.6
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RD Offshoring and RD Outsourcing Nurturing
Sustainable RD Capabilities in a Globalized
World Presentation Part 3
Global Innovation / Trends in RD Offshoring
RD Outsourcing growing in Importance / but
contracts go to professional partners / mostly
private firms
Strategic Implications for RD and Innovation
Policy
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Learn from Success Stories / Sustainable
Strategies in other Countries

• Coherent Development Strategies that build on
  Human Capital,
• Science and Industrial Innovation

• The New Eastern European Tigers Estonia,
  Slowenia,
• Czech Republic, Saxony

• The Baltic Tigers Finland,
• Sweden, Denmark

• The Celtic Tigers Ireland,
• Scotland, Wales

• The Alpine Tigers Baden-Württemberg, Bavaria,
  Austria,
• Switzerland

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Case Example of a Eastern European Tiger /
Innovation and Foreign Direct Investment in the
Czech Republic

• RD Expenditures 3.5 Billion 2005 (up from 1.3
  Billion in 1995)

• RD 1.54 of GDP (up from 0.95 in 1995)

• Strong role of RD of Foreign affiliates (52 in
  2005 / up from 27 in 1995)

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What can a Country do to build and
Leverage Sustainable RD Capabilities?

• Active, long-term and stable investment in
  Education at all levels

• Focus on Academic Excellence in Targeted fields

• Increase of RD as of GDP (to levels of gt2)

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Develop Strategic Partnerships with Corporations
and Government Agencies in Continental Europe

• Even in a Globalized World, Proximity and
  Cultural Heritage
• still matters

• Build alliances with Firms and Research centers
  especially
• in Alpine Tiger states

• Baden-Württemberg
• - Machinery / Manufuture BW
• - Mechatronics
• - Automobiles / Automobile components
• - Materials

• Bavaria
• - Specialty Electronics
• - Food / Beverages
• - Data processing / Software

• Austria

• Switzerland

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Setting the Agenda for a dedicated Programme
aimed at Fostering Innovation and Economic Growth

• Dont just follow the High-tech Bandwagon /
  Every government
• in the World targets IT and Biotech!

• Emphasize Country-specific Capabilities /
  Country-USP

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Offshoring and Outsourcing Strategien for
different elements of the Value Chain in
Multinational Corporations
Differenzierte Formen der Wertschöpfung
Etwas In-house durchführen und am Stammsitz
des Unternehmens
Etwas im Ausland durchführen, aber innerhalb
eines MNU
Etwas durch ein anderes Unterneh- men
durchführen lassen
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The Innovation Performance of Research-based
Innovation and High-tech Industries is rather
limited in Germany German Innovation
Performance is much higher in areas where the
core of value added is in Engineering Innovation
/ which build on a strong Home-base of
Manufacturing and Engineering excellence
Research-based Innovation
Engineering Innovation
Lead Market Innovation
FOREIGN BASE
Foreign Direct In- vestment in Manufacturing
Advanced Foreign Plants of German Firms
Home-base Exploiting RD
Export Strategies
Strong Home-base in World-class
Manufacturing and Engineering /
Functioning Supplier and Engineering Infrastructur
e
HOME BASE
First Commercial use often in Germany
Advanced RD In Germany
Examples Automobiles, Process engineering,
Special purpose machinery
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Increasing Trend towards Downstream Innovation
Innovation Strategies within Multinational
Corporations addressing two Key Issues

• Key Issue 1 Where is the Geographical Center /
  Locus of Innovation
• Where can we best learn about the
  Winning Combination?

Engineering- Innovation / Advanced Manufacturing
Research- based Innovation
Lead Market Innovation / Advanced Services
Traditional Interpretation / Linear-sequential
Innovation Process
Changing Pattern of Knowledge Flow in the
Innovation Process

• Key Issue 2 Where is the Core of Value Added in
  the Innovation Process / The Functional Source of
  most advanced Knowledge?
• Where is the Engine in the Innovation
  Process?

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Business Expenditures on RD also concentrated on
few Industries which increasingly go Global

Competitive Position Japan
Extent of RD Globa- lization
RD Ex- penditures 2006 (Mio )
RD In- tensity 2006 ()
Industrie


1. Pharmaceuticals Biotech 2. IT-Hardware
Equipment 3. Automobiles Parts 4. Electronics
Electrical 5. Software Computer Services 6.
Chemicals 7. Aerospace Defence 8. Consumer /
Leisure goods 9. Industrial Engineering 10.
General Industrials
70 523 64 532 60 807 27 139 26 523 17 186 15
991 14 209 9 319 8 868
15.9 8.6 4.1 4.4 9.8 3.1 4.8 6.5
2.7 2.1
Weak Strong Leading Strong Weak Average Weak Leadi
ng Strong Strong
Very strong RD Offshoring
Strong RD Offshoring


Source EU Industrial RD Investment Scoreboard
2007, INTERIS Database University of Hohenheim
2007
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Global Innovation New Modes of Knowledge
Production
International RD and Innovation Study (INTERIS)
- Sample Firms
Europa ABB Bosch Siemens Philips Alcatel Ericsso
n Nokia Akzo Bayer BASF Aventis Glaxo
Wellcome Merck KGaA Novartis Roche St.Gobain Thyss
enKrupp Sulzer DaimlerChrysler Renault Volkswagen/
Audi EADS
USA General Electric Honeywell Agilent
Technologies Hewlett-Packard IBM Lucent
Technologies Motorola Dow Chemical DuPont Ely
Lilly Pfizer JohnsonJohnson Merck
Co. Alcoa United Technologies Ford General
Motors TRW Boeing
Japan Hitachi Mitsubishi Electric Toshiba Matsushi
ta Sharp Sony NEC Kao Toray Eisaj Kyocera
Toyota
Electronics / Electrical Engineering Consumer
Electronics IT / Telekommunication Chemical
Industry Pharmaceuticals Materials /
Engineering Maschinery Automotive
Automotive Suppliers Aerospace Defense
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Does Excellence in Academic Research attract
foreign RD Units?

• Academic Excellence can be key for attracting
  foreign RD, but

• often a necessary / not a sufficient condition

• Many countries / regions build up strong
  research base, but
• do not attract foreign MNCs

• Hypothesis Foreign MNCs locate where strong
  local presence
• of Benchmark Cos signals academic excellence

Academic Excellence in Host country
Home-based MNCs in related technical area
Foreign MNCs with RD unit in Host country
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Global Innovation / RD Offshoring Major Trends
of Innovation Increasing Global Disperion of
Innovation Activities and New Forms of Open
Innovation

• Globalization of RD / RD Offshoring
• Increasing Complexity of Innovation processes
• Open Innovation / Partnering and Networking
• Innovation moving Downstream / Strong role of
  Lead customers
• New types of Standard-setting Competition
• New transnational projects combining joint RD
  and
• joint standard-setting

Success in Innovation increasingly dependent on
Global Presence and on strong Participation in
most advanced innovation networks abroad
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Managing Global Innovation
Top 10 Leading Industries / World Industrial RD
Spending
Competitive Position Japan
Extent of RD Globa- lization
RD Ex- penditures 2006 (Mio )
RD In- tensity 2006 ()
Industrie


1. Pharmaceuticals Biotech 2. IT-Hardware
Equipment 3. Automobiles Parts 4. Electronics
Electrical 5. Software Computer Services 6.
Chemicals 7. Aerospace Defence 8. Consumer /
Leisure goods 9. Industrial Engineering 10.
General Industrials
70 523 64 532 60 807 27 139 26 523 17 186 15
991 14 209 9 319 8 868
15.9 8.6 4.1 4.4 9.8 3.1 4.8 6.5
2.7 2.1
Weak Strong Leading Strong Weak Average Weak Leadi
ng Strong Strong
Very strong RD Offshoring
Strong RD Offshoring


Source EU Industrial RD Investment Scoreboard
2007, INTERIS Database University of Hohenheim
2007
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Managing Global Innovation
New Forms of Managing Innovation and the Role
of Network Embeddedness in Foreign Countries
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Managing Global Innovation Networks The Case of
Automotive Electronics Presentation Part 2
Managing Global Innovation
Innovation Networks and Standard-setting in
Automobile Electronics
Managerial Issues for three selected Projects
Jaspar, Autosar and FlexRay
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Managing Global Innovation Networks The Case of
Automotive Electronics Presentation Part 3
Managing Global Innovation
Innovation Networks and Standard-setting in
Automobile Electronics
Managerial Issues for three selected Projects
Jaspar, Autosar and FlexRay
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Managerial issues
Organizational Issues in Managing Transnational
Innovation Networks
Corporate RD / Product Devt. at German HQ
Corporate RD / Product Devt. at Japanese HQ
Coordination Problems between HQ and
European Subsidiary
Coordination Problems between HQ and
Japanese Subsidiary
Project team in Japanese RD subsidiary
Project team in European RD subsidiary
Weak represen- tation of HQ agenda in German nese
coopera- tion projects
Weak represen- tation of HQ agenda in Japa- nese
coopera- tion projects
Cooperative RD Project in Japan
Cooperative RD Project in Germany
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The Global Innovation Value Chain and the Battle
for Standards Sucessful Global Innovation
requires to manage the Full Range of the
Innovation Value Chain
The Global Value Chain
World Market Rollout
Lead Market Capability
Manufactu- ring Ex- cellence
Standard setting Strength
Intellectual Property Position
New Pro- duct Per- formance
Industrial RD
Basic Research
University Education
High Performance Innovating Country

• Downstream Innovation increasingly important

• Standard-setting and IP-Position most critical !

Competitive (Keeping pace with Top 10 Countries)
Developing (Catching-up Countries)
World Class (Top 3 Countries)
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The Global Innovation Chain and the Battle for
Standards
Who defines the Standard in Automobile
Electronics the European OEM or U.S.based
High-tech Firms?
Software (15 RD intensity)
High-tech
8-10 RD intensity
Semiconductors (12 RD intensity)
Automobile Electronics Vehicle IT
5-7 RD intensity
Automobile Suppliers (Sub-systems Components)
3-4 RD intensity
Low-tech
Automobile-OEM (Final assembly System
integration)
European strengths
U.S. dominated
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The Global Innovation Value Chain and the Battle
for Standards
Case Studies of the Battle for Standards are well
documented in the Literature

• IBM 360

• IBM Personal Computer

• VHS vs. Betamax

• Microsoft Windows

• ETHERNET

• Mobile Telephony

• Internet standards protocol

In many cases, innovators with the best
technology lost out because they were incapable
of influencing the standard and / or unable to
secure a strong IP-Position
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The Global Innovation Value Chain and the Battle
for Standards
More recently, European firms have taken a more
active role in Standard-setting Competition

• CAN

• MOST

• FlexRay

• PROFIBUS

• PROFINET

• Industrial Ethernet

• AUTOSAR

• . . .

In most of these Cases, European firms have
become quite successful in pushing the frontier
and in coordinating the Innovation race and
the Standard-setting race
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The Global Innovation Value Chain and the Battle
for Standards
Success in the Standard-setting race requires to
follow a stringent Procedure
Core members of a Standard-setting Cluster pursue
a consistent strategy emphasizing the following
elements
A. Explore basic concepts that are likely to
result in an accepted standard
B. Convince customers and downstream
complementors to invest in widespread
application thereby strengthening the standard
C. Enable suppliers and upstream complementors to
invest in necessary equipment, tools and
supplies
D. Manage intellectual property (patents, brands,
trademarks) for the major knowledge domains
E. Organize a Club that clearly defines the
roles, responsibilities and access rules for
its members
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The Global Innovation Value Chain and the Battle
for Standards
Specialization along the Global Innovation Value
Chain is feasible . . .
World Market Rollout
Lead Market Capability
Manufactu- ring Ex- cellence
Standard setting Strength
Intellectual Property Position
New Pro- duct Per- formance
Industrial RD
Basic Research
University Education
Science-driven Upstream Innovator Strategy /
Downstream Activities Abroad
Downstream Innovator Strategy / Exploiting
Foreign RD Capabilities
. . . as long as the Standard-setting process and
IP-Management is well under Control
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The Global Innovation Value Chain and the Battle
for Standards
Strategic Implications
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Ranking der technologieintensiven Sektoren und
die Bedeutung der FE-Internationalisierung in
den Sektoren
RD-Expen- ditures in million 2005
RD as - of Revenues 2005
Extent of RD Globa- lization
Industry / Sector
Information-Technology / IT-Hardware Pharmaceutica
l, Biotechnology Automobiles Parts Electronics
Electrical Software IT-Services Chemicals Leis
ure Goods / Electr. Consumer Goods Aerospace
Defense Industrial Engineering General
Industrials Telecommunication Services Health
Care Equipment Services Packaged Consumer
Goods Other Industries (Sum of 23 Sectors) All
Companies / Total of Z Co.
82,368 80,382 75,479 31,551 28,158 19,597 18,356 1
7,424 10,457 10,693 8,605 7,754
6,825 24,219 421,868
8.2 14.9 4,2 4.8 10.4 3.2 7.0 4.6 2.7
2.4 N.A. 6.4 ca. 2.0 N.A. 3.8

High Degree of RD Globalization
Medium Degree of RD Globalization Low
Degree of RD Globalization
Sources INTERIS-Database / University of
Hohenheim The 2006 RD Scoreboard